Affordable housing will be attained from smart PPP bargains

Public Private Partnerships (PPPs) attract private financing and sharing of risks in public projects or programmes. They bypass public debt yet expand delivery of public services such as sanitation, housing and transport.

In late 2017, my oversight of expert findings of the African Development Bank’s latest study on affordable housing in Kenya under PPPs was an eye opener.

Private sector project uptakes of PPPs for affordable housing are scarce beyond a slow-moving pipeline held by the PPP Unit in the National Treasury.

Yet, this pillar of the President’s “Big-4” Plan is pegged on PPPs. A new policy can be designed to yield dramatic results in the medium-to-long term. Obvious fiscal policy biases in the sector need correction.

While the Kenyatta University’s student hostel project is a pioneer in the PPP pipeline that concentrates on mega-projects planned between shrewd foreign investors and universities, aiming at increased rental space of hostels, leisure and retail-markets capacity, such projects carry foreign exchange risks.

If and when implemented, they serve a housing category designated as multiple-occupied-housing (student accommodation, hostels or care homes or any temporary type buildings, such as caravans). The category does not fit regular affordable housing.

What is the crisis of PPP uptake? The first issue in Kenya is, well, costs. According to the Center for Affordable Housing and Finance (CAHF-2015 and 2016) the cost of a generic completed and equal-standard formal house in Nairobi was the highest among 16 African countries (at $63,241) compared to the lowest cost location, Dar-es-Salaam ($18,630).

Cost in Kenya is driven mainly by the price of land and a cluster of other costs. In 2015 and 2016, urban land cost of the generic affordable house was the third costliest in Africa ($14,826) for comparable units, 120 square metre stand. It was bypassed only by costs in Kampala ($15,229) and Dakar ($14,874).

Associated components — infrastructure, compliance, construction, and other development costs (legal fees, surveying etc.) were among the costliest five and never below the costliest ten in Africa.

Second, a general scarcity of housing (called excess demand), drives price escalation. Scarcity displaces low income households from affordable housing even when the units are custom-built for them.

Against policy blueprints targeting the provision of 200,000 housing units annually for all income levels, less than 50,000 housing units currently enter the Kenyan market annually; the accumulated deficit is over 2 million units.

A price spiral and speculative holding of units is a race to the bottom. Higher income households and investors displace low-income households.

The “Big-4” Plan target of 500,000 units over five years will face similar displacements unless policy is altered to address the scarcity that erodes affordability and that creates a flow of investors on the supply side (read developers) and on the demand side (read investors who buy not just for accommodation but for speculation and high rates of return).

As an asset class, real estate in Kenya consistently outperformed other classes over the last five years, with returns of over 25 per cent yearly compared to an average of 10 per cent annually in the traditional asset classes. Prices in 2013 for instance were nearly three times those in 2000.

Prices of residential units outperformed rental yields that averaged only 5 per cent, while office and retail space averaged 9 per cent per annum and 10 per cent per annum, respectively.

The market structure leaves some 90 per cent of Kenya’s urban households living in rented houses, as estimated by the World Bank. Only about 10.2 per cent of urban households could afford the cheapest newly built house in 2015, estimated to cost about Sh 1.7 million / $17,000.

High costs against low incomes (called low effective demand) and growing informal sources of income exacerbate housing scarcity, supporting the rental market more than home ownership and depressing formal bank mortgage lending.

Three key players dominate the supply of affordable housing: government, saccos, and private sector developers. It is a tripartite compact.

READ: How we can attain the noble dream of affordable housing

Each operates in a cocoon. Government supplies mainly public housing, for police, civil servants, etc.; the private sector remains reticent to PPPs, yet benefits from government; a wrong-footed fiscal policy on the supply side still rewards private sector developers with a 15 per cent corporate tax waiver if they provide 400 affordable housing units per year.

Saccos work with meagre financing and little in government support. No other segment has attracted much PPPs activity though the PPP Unit as the National Treasury works hard to ensure that PPP regulatory boxes are ticked.

In the sacco sector, the National Cooperative Housing Union (NACHU), an apex organisation for registered primary housing cooperatives, works hard to provide affordable and decent housing.

NACHU has more than 800 housing cooperatives in eight regions of Kenya. It leads in the provision of housing microfinance, capacity building and technical services, unnoticed in fiscal policy or bank lending.

A third factor hampering affordable housing is financing, an obstacle to domestic PPPs engagement. It is a double-edged problem: scarcity and cost of credit to domestic developers for construction; and high-cost mortgage rates to house buyers.

While saccos and cooperative networks provide 90 per cent of housing credit in Kenya at about 12 per cent interest, banks provide only 10 per cent and are pressing for the interest rate cap of about 14 per cent to be scrapped.